EU fails to tackle bank regulation

6 May 2013

EU fails to tackle bank regulation

SP Euro-MP Dennis de Jong is not satisfied with recently adopted bank legislation. ‘Without further new legislation there remains a real risk of a renewed banking crisis in Europe,’ he says.

Dennis de Jong is a Member of the European Parliament for the SP

Last week the European Parliament threw a bit of a party. During the plenary session In Strasbourg new bank legislation – known as the CRD IV package - was passed by an overwhelming majority. The new law is designed to ensure that the banks have adequate capital buffers and sufficient liquidity on hand to cover their obligations. In other words, CRDIV should give us again a banking sector that we can trust.

Muddling along must stop

In the same week the IMF presented its extremely critical Global Financial Stability report. This received a great deal less attention in Strasbourg. Its message would have tainted the party atmosphere and was therefore better ignored. In my view, the IMF report will, however, figure prominently on the Brussels agenda. It shows that the muddling approach of the last five years isn’t working.

The IMF concludes that the banking sector throughout Europe is still in an extremely weak condition. The banks are making insufficient efforts to ensure that capital buffers are adequate, while the relationship between loans and funds – the leverage ratio -is still too high. We must tackle this and not shy away from radical measures. In common with the IMF I am calling for rapid splitting of the banks so that normal payment movements are separated from risky banking activities.

Furthermore it would be good for public confidence in banking were the European Commission to cease encouraging member states to sell off national banks but instead begin attempts to persuade them of the need to establish a reliable state bank alongside commercial banks. In addition, alternative forms of banking, via credit unions and cooperatives, should be encouraged. Certainly when it comes to small-scale initiatives, such institutions ensure improved credit extension with no question of a bonus culture and no taste for irresponsible risk-taking.

Voting against

I did, moreover, vote against parts of the CRD IV package. Contrary to what most MEPs would have you believe, what we have here is in fact a postponement manoeuvre. On capital buffers, while the new rules aren’t watertight, they do at least represent progress. Similarly the limit on bonuses to one or, if shareholders approve, two years’ salary is an improvement, even if the limits could in my view have been much tighter. On the leverage ratio, however, nothing was agreed. This was postponed until 2018. The short term liquidity demand will be phased in between 2015 and 2018, while the long-term liquidity demand remains unregulated. So CRD IV is as full of holes as a Swiss cheese and fails as a serious answer to the banking crisis.

CRD IV says nothing about a split in banking activities, and though European Commissioner Michel Barnier has announced that he will bring forward proposals before the end of the year you can see that he is dreading this. While the IMF is warning against banks who remain ‘too big to fail’, and the Commission received similar advice last year from the Likaanen Group, a body which it had itself established, Barnier appears to be afraid of the financial lobby. Yet now is the time to act.

Help small firms

The banks argue that if we really do properly tackle them, the credit stream to business will quickly dry up, and that it will be smaller businesses which suffer. There’s a kernel of truth in this, even though it’s hard to understand why small-scale initiatives such as credit unions can lend money and major banks can’t.

In order to help small businesses, governments must accept their responsibilities. Instead of postponing needed bank reforms, the member states could establish national investment banks. The money that the European Investment Bank (EIB) has allocated to loans to small businesses could be deployed via such national institutions, which would at the same time put an end to the practice of the existing, commercial banks of lending willingly to middle-sized companies while neglecting the smallest.

Instead of celebrating half-baked legislation, the member states and the European Parliament must take the IMF report seriously and bring forward in short order new, more radical proposals. Otherwise, as the IMF has also said, a new banking crisis is a real risk, especially in Europe.

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